Interest Rates - Up Or Down ?

[tab]

...and every industry, and then "the recession that we had to have"

[BFHOON]

that's what they will be saying tab.

it oftern runs in 12 year cycles so we are due for a nother recession just based on historical info.

the liberal stooges will be saying look see what happens labor gets in and we have a recession. but its the recession we had to have delayed by the mining boom.

[SCRIBR]

isn't it partly caused by the mining boom?

e.g. I have a mate who works in WA that just got a pay rise to $80 a hour...

[turbotrana]

We are headed for high inflation, high interest rates and a global recession helped along with high fuel prices. Even if your property price stays the same you are still going backwards. A time to buy your own home, probably yes as rentals are an issue ATM, to buy an investment home, I'd say No. I would not be taking out a massive mortgage ATM where you have to think hard about whether you need a fixed or variable interest rate.

[Grudgee]

Nobody is going to know exactly how the rates will travel over the next 5 years, but if you know you can afford to repay the loan at whatever rate you can fix it at, and you like the security of not having to worry, just fix the bastard.

With my investment properties, I fixed the lot, so I can properly forecast and have a 100% understanding of what's coming up. Rate rises don't effect my repayments and by the time they come out of the fixed term, I have 5 years of capital growth under my belt. Refinancing at the end of the term means it's always manageable.

For our home, I split it 50/50 as I had no idea what was going to happen and wanted to sit on the fence.

If you're there for 10+ years, don't even worry about what you pay for it, as it's your home, not an investment. We paid over the odds, as we wanted the house. Over time you'll recoup the difference and end up in front.

[bcl]

Mal,

I know you’re a business man, so my comments below may be relevant.

I do not concern myself with the actual amount of the repayment, or the size of the loan, or whether it’s fixed or variable; rather my capacity to pay, and overall cash flow of all transactions, taking into account and factoring in a rise in interest rates.

I have held this principle for over 20 years, and it has worked well.

For over 20 years I have had equity credit loans, used to fund my primary home purchase, investment properties, and occasional business top-up for short term borrowings. I started this approach in 1988 when I bought my 3rd investment property.

I always have a credit facility larger than my actual needs, so I have a buffer against an increase in interest rates. I remember this got me out of trouble back around 1990 when mortgage interest rates hit close to 20% (and people complain now) when I had over $0.5 million mortgage.

I currently have a large Veridian loan with CBA, interest rate 8.89%.

The other thing to note is that this not a “credit fonsia” loan. I just pay interest, so overall payments are less as I don’t have to worry about the burden of paying back principal, giving you more capacity to pay and flexibility, or capability to borrow more for a given level of repayment. Historically, I have paid off debt as fast as I can, then buy an investment property to spread my cash flow and get some tax deductions, although the tax deduction issue is less important now given lower marginal tax rates and more advantageous super (meaning a change in investment strategies).

I hate having non-tax deductibility of debt, however you do have the benefit of tax free capital gains with principal place of residence. In the past I have capitalized interest from investment properties, and effectively turned non-tax deductibility debt into tax deductible debt. My accountant loved it when I hatched that scheme to him 20 years ago, but I doubt the tax authorities would be too impressed now.

If you want more information please call me.

Current talk is of a further rise in interest rates.

Brian

[markxr6t]

I know that Mal is buying a family home, but fixing at over 10% still doesn't make good financial sense to me.

Purely from a business sense, if I fix at over 10% interest for 5 years, I am betting on better than 10% growth per annum on my property for the next 5 years to be in front (assuming that shortfall in rent is negated by tax benefits - which it rarely is). I don't think we will see 10% growth pa in property values in the next 5 years in Australia.

Fuel will go up, rent will go up (we're still a growing country remember - not like Western Europe and other economic quiet areas) and spending will resultingly (and hopefully) reduce in other areas to neutralise net inflation.

Are you now suitably confused with our varied opinions Mal? :banghead:

Edited 29/05/08 01:02 AM by markxr6t

[bcl]

I know that Mal is buying a family home, but fixing at over 10% still doesn't make good financial sense to me.

Purely from a business sense, if I fix at over 10% interest for 5 years, I am betting on better than 10% growth per annum on my property for the next 5 years to be in front (assuming that shortfall in rent is negated by tax benefits - which it rarely is). I don't think we will see 10% growth pa in property values in the next 5 years in Australia.

Fuel will go up, rent will go up (we're still a growing country remember - not like Western Europe and other economic quiet areas) and spending will resultingly (and hopefully) reduce in other areas to neutralise net inflation.

Are you now suitably confused with our varied opinions Mal? :banghead:

I would not draw your conclusion at all.

I'll give you some numbers as an example to work with.

Assume:

1. purchase price $1 million

2. have 20% equity

3. borrow 800k at 10% pa = 80k pa

4. current rent @600pw = 30k pa

5. investment income forgone on the $200k ; say @5% net = $10k pa

In this example you'd break even (after tax) with a 6% growth in property values; not the 10% you state.

Get over 6% asset growth and you're ahead. If you achieve a 10% increase in property (unrealistic) you'd be a net $40k pa ahead.

You need to look at the full picture and play with the numbers, but always focus on cash flow and ability to pay, and the impact on your net wealth.

Areas such as where Mal is looking at has good long term capital growth.

Although property has its cycles, like most forms of investments, it's the big years coupled with the tax free nature of the primary property where your assets can take a big leap in value.

If you have good job prospects never be afraid to back yourself.

Brian

[markxr6t]

Yes I agree with you Brian. I deliberately oversimplified the Maths to demonstrate why I wouldn't fix for 5 or 10 years at 10%+, and not to to deter anyone from buying property (see my earlier post). If the claim that property doubles in value every 7- 10 years remains true, then property will increase by an average of 7% a year to double in 10 (which is close to your 6% break even). So I just think that a variable at 8.7% is a better option.

I guess we all have opinions based on our experience (and I've gathered your experience is based on running successful businesses so please don't think I'm trying to say I'm right, you're wrong - I'm just a salaried employee and occasional property investor whose learnt from my mistakes). In 93 I bought my 2nd investment property and fixed interest at 10% for 5 years. It was a good move for 2 years, but for the last 3 years when rates were around 7 - 8% I regretted it and vowed that I would only fix again at a "bottoming" of a cycle and for 3 years maximum. After that 5 years, the property I bought for $76k was worth $85k. A poor investment and poorly financed, but what a fantastic lesson and I've only improved as an investor since.

Like you, I use lines of credit to support cash flow when things are tight which is my buffer for choosing to go variable.

And yep - I also agree that buying premium property and holding onto it is a no brainer

[Ghosti]

As a 22 year old who's just starting to think about buying my first home (with the mrs. of course) I read through this topic trying to absorb as much knowledge as I possibly could.

But reading your posts just highlighted how completely clueless I/we are in this entire area.

Can anyone give me a good place to start trying to learn about how it all works?

At this point it feels so far beyond my comprehension that I'm thinking we may not be prepared enough to even start thinking about buying, as the last thing I want to do is rush into something without fully understanding it and being burnt for years down the track as a result.

Thanks in advance.